SanDisk Corp. SNDK reported third-quarter 2015 adjusted earnings of 98 cents per share, which surpassed the Zacks Consensus Estimate of 65 cents. Earnings per share however decreased from $1.31 reported in the year-ago quarter. Adjusted earnings per share (on a proportionate tax basis) exclude amortization of acquisition-related intangible assets and convertible debt interest but include stock-based compensation expense.
Revenues
Although total revenue decreased 16.9% on a year-over-year basis to $1.452 billion, it came slightly ahead of management’s guided range of $1.35 billion–$1.45. Also, reported revenues surpassed the Zacks Consensus Estimate of $1.404 billion. The year-over-year decline was primarily due to competitive pricing pressure and unfavorable product mix.
Furthermore, revenues from Commercial channels (67% of third-quarter revenues) increased 28% sequentially, mainly attributable to several design wins in client SSD. Embedded revenues (part of commercial revenues) were up sequentially, mainly due to 15 nm SSD design wins.
SanDisk’s revenues from Retail channels (33% of third-quarter revenues) increased 1% sequentially, primarily as a result of the upcoming holiday season and better-than-expected demand for imaging cards and SSDs.
Operating Results
SanDisk’s adjusted gross profit (including stock-based compensation but excluding other one-time items) in the quarter came in at $631.7 million, down 25.7% from the year-ago quarter. The year-over-year decrease was primarily due to competitive pricing pressure, unfavorable product mix and lower revenue base.
Adjusted gross margin also decreased 521 basis points (bps) on a year-over-year basis to 43.5%. Gigabytes sales during the quarter were also up 30% year over year whereas blended ASP (Average Selling Price) per gigabyte declined 37% on a year-over-year basis.
SanDisk’s adjusted operating expenses decreased 16.1% year over year to $352.2 million. As a percentage of revenues, operating expenses were up 22 bps from the year-ago quarter. The year-over-year decrease was primarily due to reduction in restructuring charges and lower cost of sales.
The company reported operating profit (including stock-based compensation but excluding other one-time items) of $279.5 million, down 35.1% from the year-ago quarter. Moreover, operating margin declined from 24.7% in the year-ago period to 19.2%.
Excluding the amortization of acquisition-related intangible assets, convertible debt interest expense and related tax adjustments but including stock-based compensation expense, net income for the third quarter came in at $187.9 million compared with $303.6 million in the year-ago quarter.
On a GAAP basis, net income during the quarter came in at $133 million compared with $262.7 million in the year-ago period.
Balance Sheet & Cash Flow
Cash and short-term investments were $1.69 billion compared with $1.76 billion in the previous quarter. Long-term marketable securities were $2.18 billion. SanDisk had $2.14 billion of convertible long-term debt in its balance sheet.
SanDisk generated $274.9 million in cash from operating activities compared with $28.9 million in the prior quarter. Free cash flow for the quarter was negative $171 million. During the quarter, SanDisk repurchased shares worth $250 million and paid dividends amounting to approximately $62 million.
Outlook
SanDisk remains positive on the strong demand from OEM customers and 15-nanometer technology node. Management further expects bit supply growth to be approximately 40% in 2015.
SanDisk expects revenues for the fourth quarter to be between $1.4 billion–$1.475 billion. The Zacks Consensus Estimate is pegged at $1.594 billion.
The company expects its fourth quarter non-GAAP gross margin to be approximately in the range of 40% to 43%. SanDisk expects operating expenses in the range of $335 million to $345 million.
Our Take
SanDisk posted better-than-expected third-quarter 2015 results, surpassing the Zacks Consensus Estimate on both counts. Retails and Commercial channels were positive in the quarter. However, year-over-year comparisons on both counts were unfavorable, primarily due to competitive pricing pressure and unfavorable product mix.
Moreover, the company provided tepid fourth quarter revenue guidance. Nonetheless, the strategic acquisitions of Fusion-io Inc and SMART Storage Systems are expected to expand SanDisk’s offerings in the Enterprise SSD segment.
It is also worth mentioning that according to a recent Bloomberg report, SanDisk was looking to sell itself. Reportedly, Micron Technology and Western Digital Corp. WDC had expressed their interest in acquiring the memory chipmaker. However, none of the companies have confirmed the news. The discussions may not even lead to a transaction.
Going forward, lackluster PC sales, competition from peers and currency fluctuations will add to its woes.
Currently, SanDisk has a Zacks Rank #4 (Sell).
Better-ranked stocks in the technology sector include Juniper Networks, Inc. JNPR and Jabil Circuit Inc. JBL, both sporting a Zacks Rank #1 (Strong Buy).
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